Ask the Experts: Credit limits and credit scores
My credit score recently dropped a little, but I have not had late payments. If a debtor increased my credit limit, does it affect my credit score? - Barbara
Hi Barbara –
Your available credit limit is definitely a factor in how your credit score is calculated, but how it impacts your particular score is very specific to your unique situation.
Generally, an increased credit limit results in an improved credit score. That’s because a large portion of how your score is calculated is based on your credit utilization. That basically means if you’re using too much of your available credit you’re thought to be at a higher risk for potential default. By increasing your limit, your utilization percent drops, which is good for your score.
For an example, if your limit is $1,000 and your balance is $700, you’re using 70 percent of the available credit, which means you’re relatively close to maxing out the account. If your limit increased to $1,500, however, and your balance was still $700, your credit utilization would drop below 50 percent, which would make you seem less risky to any potential new lenders.
That’s not an automatic, though. Remember, your credit score is ultimately about risk, and there are so many other factors involved in your credit score besides late payments that it may be difficult to pin down exactly why your score slipped a bit.
Did your debt level increase? Again, the amount of your available credit currently being used is a big factor in your score, so if you’ve used a good portion of that increased limit your score could drop.
Did you close any accounts recently? Credit length is another important factor in your score. Because having long, established relationships with old creditors can make you seem less risky to new creditors, closing old accounts can cause your score to dip.
Did you receive a sizable credit increase? If you requested a substantial increase to your limit, your creditor likely pulled a copy of your credit report before making the decision to increase the limit. A “hard pull” of your credit often reduces your score (though usually not by much).
Whatever the cause of the dip, as long as you continue to use credit wisely and make all of your payments on time, chances are good that your score will return to normal soon.
If you need more assistance understanding the contents of your credit report and credit score, we offer credit report reviews. A trained counselor will pull your credit report and review all the information with you, including your current score. The service is free, but only available for a limited time. See our Credit Report Review page for more information.
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